Monopolistic refers to an economic term defining a practice where a specific product or service is provided by only one entity. Hence the entity supplying the product or service has the dominance in its price-fixing and deciding on the market output.
In economics, monopolistic competition occurs when several firms offer products or services with similar basic functionality, but they are unique in their own way. Whereas a monopolistic market exhibits a single entity’s domination in supplying a product and service to the market, it implies a pure monopoly.
Table of contents
- Monopolistic economy refers to the practice in which an entity possesses the exclusive advantage of controlling the output and price of a product or service offered by them. It is because they are the sole producers of that particular product or service.
- A monopolistic market exhibits a market in which only one entity engages in producing and supplying the product or service.
- Monopolistic competition describes the scenario where an industry contains many producers and consumers enjoying few barriers to entry and exit.
How Does Monopolistic Economy Work?
The monopolistic competition reflects a few features of monopoly and perfect competitionPerfect CompetitionPerfect competition is a market in which there are a large number of buyers and sellers, all of whom initiate the buying and selling mechanism. Furthermore, no restrictions apply in such markets, and there is no direct competition. It is assumed that all of the sellers sell identical or homogenous products.. For example, the producers are price takers like monopoly players and comprise many suppliers, availability of substitute productsSubstitute ProductsAny alternative, replacement, or backup of a primary product in the market is referred to as a substitute product. It refers to any commodity or combination of goods that might be used in place of a more popular item in normal circumstances without affecting the composition, appearance, or utility., free entry, and exit as in perfect competition. At the same time, a monopolistic market represents an example of a pure monopoly like enjoying full market share and control due to lack of competition. Thereby utilizing the chance to impose high prices.
As the only player in the market with a monopolistic structure, such firms can tweak various elements to produce maximum profits. A monopolist also has the leverage to demand lower prices for input products from suppliers. Hence increasing the profits at the expense of input suppliers and quality.
In the short run, monopolistic competition exhibits firms earning economic or supernormal profit by producing quantity (Q) where marginal revenueMarginal RevenueThe marginal revenue formula computes the change in total revenue with more goods and units sold." The value denotes the marginal revenue gained. Marginal revenue = Change in total revenue/Change in quantity sold. (MR) is equal to marginal costMarginal CostMarginal costing in economics and managerial accounting refers to an increase or decrease in the total cost of production due to a change in the quantity of the desired output. It is variable, depending on the inclusion of resources required to produce or deliver additional unit(s) of a product or service. (MC). The total profit in this scenario will be equal to the product of quantity (Q) and the difference between average revenue (AR) and average cost (AC). AR curve also represents the downward sloping demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal. resembling the monopoly feature. Whereas, in the long run, when new participants enter the market, the demand decreases, and the demand curve (D=AR) and MR curve shift to the left, revealing the decrease in sales leading to normal or reduced profit.
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Countries like the United States and China have antitrust laws, making it unlawful for firms to manage their operations to become a monopoly. They also describe unfair practices in business and penalize entities exercising and benefitting from such practices. However, there are examples of monopolists in US history and even currently. A prominent example of such a monopolist is John D. Rockefeller. It is also an example of an entity forced to break up its company to stop breaching antitrust laws.
One of the richest Americans of all time, Rockefeller owed his success to oil prospecting by starting the Standard Oil Company in 1870. It became a large conglomerateConglomerateA conglomerate in business terminology is a company that owns a group of subsidiaries conducting business separately, often in distinct industries. It reflects diversification of operations, product line and market to allow business expansion. and became the prime oil supplier in the United States with time. The company controlled ninety percent of oil production in the United States during the 19th century.
The company engaged in acquisitionsAcquisitionsAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion., horizontal and vertical integration, along price lowering practices to depress the competitors. Hence the company reflected monopolistic behavior. In 1882 they combined their businessesCombined Their BusinessesA business combination is a type of transaction in which one organization acquires the other organization and therefore assumes control of the other organization's business activities and employees. In simple terms, it is a consolidation of two or more businesses to achieve a common goal by eliminating competition. under trust as a reaction towards state laws limiting company activities. By 1892 antitrust legislation resulted in the dissolution of trust and initiation of ending their oil monopoly. By 1911, under Sherman Antitrust ActSherman Antitrust ActSherman Antitrust Act is the legislation enacted by the US Congress to tackle monopolistic tendencies that reduce competition and interfere with trade and commerce. It prohibits deliberate or inorganic attempts to make competition unfair but not organic growth or monopolies formed through genuine means., the entity was also split into 34 companies, and these companies now form part of the core of the United States oil industry.
There are a lot of examples of monopolistic competition. It includes industries where it is easy for a new entrant to establish their business, exploring non-price competition opportunities and at the same time confronting less pricing power like the hospitality industry, fashion and apparel, confectionery industry, and consumer electronics.
In a monopolistic market, the entity enjoying dominance earns profits year after year without doing anything significant. Since the firms are under no pressure from the competition, they may be sluggish to evolve and innovate but still make a profit. Consumers have no alternatives available, and firms are not motivated by any incentive to follow incessant product improvisation. Even if the scenario includes few companies compared to one in pure monopoly, they still enjoy significant market share and little competition.
Many firms producing differentiated products and free entry and exit of participants causing downward sloping demand curve and insignificant profit figure demonstrate the characteristics of monopolistic competition. A large number of firms together serve a large customer base. They enhance their profit by creatively differentiating and delivering better products at a lower price. In addition, they spend a considerable amount on public relations and advertising to compete with other market players.
Frequently Asked Questions (FAQs)
Monopolistic practice occurs when a single entity like an individual or a company controls the supply of a particular product or service in the market. In such cases, the entity enjoys zero competition since it is difficult for other participants to enter such a market.
Monopolistic behavior exhibits the characteristics like dominance. In a business scenario, the monopoly behavior of entities results in control over the supply of products and services. However, they cannot control the sales, unlike the supply and price. It also causes disadvantages like reduced choice in the particular product or service category.
Examples of industries in which many firms produce similar products or services and work to gain competitive advantage and subsequent market share through product differentiation include the fashion industry, beauty, cosmetic products, and consumer electronics.
This has been a guide to Monopolistic and its meaning. Here we explain how a monopolistic economy works along with an example and its characteristics. You can learn more about financing from the following articles –